Question

How does the budget line change if the price of good 2 decreases by a rupee but the price of good 1 and the consumer’s income remain unchanged?

Answer 1

P₁ = Rs 4

P₂ = Rs 5

M = Rs 20

Since the income and the price of good 1 are unchanged, the decrease in the price of good 2 will increase the vertical intercept of the budget line. The new budget line will also pivot outwards around the same horizontal intercept.

Horizontal intercept

Vertical intercept

Slope

The slope of the new budget line will be more and the new budget line will be steeper than the original one.